Gold prices, as measured by the XAU/USD pair, are consolidating after having hit new all-time highs earlier this week. The jump peaked on Wednesday when XAU/USD reached $3,578.50, an extraordinary seven-day rise. As traders assess market conditions, including recent job data and Federal Reserve signals, XAU/USD is currently trading around $3,540 during the European session.
Over the past one-year period, gold’s latest showing glimmers spectacularly. Softer U.S. yields have provided the ideal backdrop, providing steadfast support for this deeply-coveted precious metal. Yet, even as year-on-year numbers bring the good news, momentum indicators increasingly point to a cooling trend, pushing some analysts to speculate on short-term corrections.
Recent Market Trends
On Wednesday, XAU/USD set an all-time high of $3,578.50 before starting to consolidate. This milestone has established an important resistance level for the pair. Market participants are now waiting with bated breath, hoping that a persistent break above this level could allow it to continue gaining ground towards the $3,600 region.
Even with this bullish momentum behind them, the current trading environment suggests that XAU/USD is starting to overextend itself. The price has risen to touch the upper Bollinger Bands, which is indicative of bullish market strength and a warning of possible pullbacks. This has pushed the RSI indicator even further above 70, indicating that XAU/USD is in an overbought territory. The RSI is making a clean bearish trend, diving under 50 recently. So this means that we could be due for a pause or pullback in the very near future.
With profit-taking in the mix and the U.S. Dollar appearing more stable, XAU/USD was pushed down below $3,510 earlier in this day. This retreat further underscores the narrow path traders need to walk after this past summer’s large advance in gold prices.
Economic Indicators and Fed Signals
In short, one of the most important drivers behind gold prices is the recent hawkish tone from U.S. Federal Reserve officials about the direction of monetary policy. Federal Reserve Governor Christopher Waller mentioned that the central bank could “start cutting rates at the next meeting.” This exceptionally dovish outlook further enhances the bullish backdrop for gold. Higher interest rates, on the other hand, are a headwind for non-yielding assets such as gold.
The Federal Reserve’s Beige Book gave us a similar glimpse, providing important details from each District. Firms are expecting these price increases to continue over the next several months. Nearly all Districts said that their companies were anticipating further price increases in coming months, with three of those Districts citing an acceleration in the rate of price increases. The report indicated these types of expectations can shape investor behavior and help spur demand for gold as a hedge against inflation.
Technical Analysis of XAU/USD
Technicians have bemoaned the recent bullish XAU/USD price action, looking for higher T/bills yields and a stronger dollar. As it stands now, XAU/USD is trading just below the upper band of the Bollinger Bands indicator around $3,543. This kind of technical positioning implies that on the one hand, bullish momentum is very strong but on the other hand there are signs of overextension.
Should XAU/USD experience more aggressive profit-taking, a recovery back to mid-band is expected. Such a move would coincide with the 20-day Moving Average (MA) at just over $3,398. Such a step would create space for buyers to re-enter at more attractive valuations before any eventual up cycle.
Market participants will be waiting to see the next few economic data releases. More importantly, they’re looking at geopolitical happenings that can affect gold’s ongoing direction. Supply and demand dynamics continue to be very important as investors look at the potential opportunities that lie ahead.